NC Aims to Boost Economic Performance With Tax Cuts and Reforms

North Carolina’s General Assembly is considering two reform plans that would markedly improve the state’s economic competitiveness, according to an analysis by the Tax Foundation.

North Carolina would climb from 44th to 19th place on the Tax Foundation’s State Business Tax Climate Index if the two proposals pass.

“North Carolina’s tax system is in desperate need of reform,” said Elizabeth Malm, an economist at the Tax Foundation. “The system includes high individual income taxes, a corporate income tax that exceeds its neighbors’, and a sales tax base that excludes a large portion of transactions. By flattening and lowering income taxes, the system becomes fairer, simpler, and more neutral.”

Flat, Lower Tax

The Senate Finance Committee is considering the “Tax Fairness Act of 2013” which would lower the individual income tax rate to a flat 4.5 percent, shrink the corporate income tax rate to 6 percent, and repeal several corporate tax credits. The income tax reductions would be offset by application of a 6.5 percent combined state-local sales tax rate to a broader tax base that includes most services, food, and prescription drugs.

The Act would also decrease the franchise business tax and end the state’s estate tax, which would improve North Carolina’s economic competitiveness by eliminating these cases of double taxation of businesses and individuals, according to the Tax Foundation.

Under the Tax Fairness Act, taxes would be cut a total of $1 billion by the time it was fully implemented in 2017.

“The Senate proposal is the most robust in terms of income tax base broadening,” said Malm. “It closes multiple tax expenditures in the individual and corporate income tax code that distort behavior, add unnecessary complexity, and require higher rates to compensate for a small tax base.”

Similar Approach in House

Meanwhile, House lawmakers are debating the “Tax Simplification and Reduction Act,” which would consolidate the state’s three individual income tax brackets into one and lower the rate to 5.9 percent, lower the corporate income tax to 5.4 percent, and cut the combined state-local tax from 6.75 percent to 6.65 percent while broadening the tax base to include certain services.

“High income and business taxes deter economic development by discouraging higher-income earners and new capital from moving into a state, remaining there, or investing their money. This tax reform plan would improve North Carolina’s economic competitiveness by leaving more money in the pockets of the state’s citizens and businesses to spend, save, and invest,” said Matthew Glans, senior policy analyst at The Heartland Institute, which publishes Budget & Tax News.

One of North Carolina's border states is Tennessee, which has no tax on wage income.

Highest Taxes in Region

“In the actual House legislation (HBB998), it states that [North Carolina’s] ‘income taxes are now among the highest in [the] region and among … peer states,’ so I would venture to guess that one of the driving forces behind the tax reform push is to make North Carolina competitive in terms of taxes,” said Malm. “The top individual income tax rate is the highest among all of the state’s neighbors, as is the corporate income tax rate.”

Both of the tax proposals expand the sales tax to some degree, but the Senate’s “Tax Fairness Act of 2013” increases the sales tax to cover more than 130 additional services. Broadening the sales tax to include most services, food, and prescription drugs could be criticized for being regressive.

“I think it’s important to remember that these income tax cuts benefit everyone, and also that there are ways to address sales tax regressivity [perhaps through a cash ‘prebate’], so I don’t think this is a reason to throw out the plan in its entirety,” said Malm. “North Carolina already stands out for a lot of reasons, and if the state were to adopt a tax reform proposal similar to one of these plans, it could stand out in terms of taxes, as well.”